The Other Side

A Remedy for Revolving Security Deposit Disputes

by J. Wallace Oman

It is well known that at the end of some tenancies, tenants sue their landlords over security deposits. But some security deposit lawsuits are not about the usual issues—alleged physical damage or unpaid rent and resulting deductions from the security deposit—and instead involve withholding the entire deposit because of a structural problem that could be prevented by a little foresight from landlords.

Here’s an example: Assume that three tenants, let’s call them Curly, Larry and Moe (with apologies to The Three Stooges), rented a three-bedroom flat in San Francisco in 2000 that required a security deposit of $2,400. Each tenant contributed $800 to the total security deposit by giving an $800 check to the landlady, Wanda, and each tenant signed the one-year lease, which converted to a month-to-month tenancy at the end of the year. Each month, Moe paid all the rent to Wanda after getting one-third shares of the rent from each of his two roommates.

In 2003, Curly decided to move out of state and, with Wanda’s blessing, the two remaining original tenants, Larry and Moe, got a new roommate, Chico. Curly arranged with Chico for the latter to pay him the $800 portion of the security deposit and told Chico that the $800 Curly had given to Wanda as one-third of the original $2,400 security deposit would go to Chico when the tenancy ended. (Wanda, of course, served a 6.14 notice on Chico when he first moved into the flat.)

You’ve probably guessed what happened next. In 2004, Larry decided to move to some unknown place out of the country, so Moe and Chico got a new roommate, Harpo. Harpo gave Larry $800 for his share of the $2,400 security deposit (and, of course, Harpo got a 6.14 notice from Wanda).

In 2005, Chico and Harpo unexpectedly moved away, and Moe got two new roommates–with Wanda’s approval–Groucho and Gummo (apologies to Zeppo, who did not make it into this hypothetical), who each gave $800 to Chico and Harpo, respectively, for their share of the $2,400 security deposit. (The security deposit had not increased in size because Wanda was very careful each year to pay the proper interest on the security deposit to the original tenants who remained in the flat, and the original tenants shared each interest payment equally with their other roommates.) Again, Wanda served 6.14 notices on Groucho and Gummo.

Then, in 2006, Moe decided to move, and Wanda wanted to raise the rent for the flat to market rate. Groucho and Gummo declined to enter into a new tenancy at the higher rent and instead rented a new apartment. They also asked Wanda to give them back their two $800 security deposit payments.

Wanda acknowledged that the now vacant flat was in excellent condition—except for normal wear and tear, it was in the same condition it had been when first rented to Curly, Larry, and Moe in 2000—but, on the advice of her lawyer, and in an abundance of caution, she would only issue a security deposit refund check payable to “Curly, Larry and Moe”—unless Groucho and Gummo had written authorizations/releases from Curly and Larry stating that their one-third shares of the $2,400 security deposit could be paid to Groucho and Gummo. Of course, they did not have those releases, although they did get letters from Chico and Harpo describing how they had handled their own security deposit transfers.

Wanda’s written rental agreement with the tenants states: “Owner’s check or other draft refunding any balance of the Security Deposit may be made in the name of all original tenants regardless of the party who in fact made the deposit and regardless of the identity of the persons then occupying the Premises.”

Also, Civil Code §1950.5(d) provides that “Any security shall be held by the landlord for the tenant who is party to the lease or agreement.” Civil Code §1950.5(g) requires the landlord to “return any remaining portion of the security to the tenant”—arguably the original tenant who made the deposit in the first place.

Angrily, Groucho and Gummo filed a small claims lawsuit against Wanda and Moe, which included a statutory claim for $4,800—twice the amount of the security deposit—for bad faith retention of the security deposit, and Moe himself filed a cross-claim against Wanda for damages. Wanda was not totally surprised by the dispute, but knew that she was just “going by the book” and was unwilling to pay $800 each to Moe, Groucho and Gummo because she didn’t want to take the risk that she might be sued later by Curly and Larry for the security deposit. Wanda also believed that it was the responsibility of each of the tenant roommates to keep the necessary documentation, authorizations and releases concerning the security deposits.

Groucho and Gummo, on the other hand, think that Wanda is ripping them off or, at a minimum, getting the undeserved windfall of their security deposit. They say accurately that everyone concerned, including Wanda, knows the procedures that were followed regarding the “revolving” security deposit.

It is not clear how a small claims court judge will rule but, because the judges are often attorneys acting as pro tem judges, it is as likely that the case would be decided in favor of the tenants as in favor of the landlords.

What could Wanda and the tenants have done to prevent this dispute from arising? First, the departing tenants could have left copies of their releases (of their claims for their share of the security deposit) with both the remaining tenants and with the landlord, and the new tenants could have obtained the necessary releases from the tenants they were replacing when they paid them for their share of the security deposit. But this procedure assumes a level of knowledge and organization that many, if not most, tenants do not possess.

Second, Wanda, who is in the residential rental business and who should have experience and knowledge of procedures to prevent problems like this, could have taken affirmative action to procure and keep the necessary releases. For example, if Wanda knew that Curly had released his share of the security deposit to Chico, then Wanda should honor a security deposit release from Chico to Groucho and should not require Groucho to present a release from Curly. But right now there is no legal duty for Wanda to obtain those releases.

To prevent the type of problem illustrated here—one that occurs several times a month in San Francisco Small Claims Court according to an official—our California Legislature should enact a statute that amends Civil Code �1950.5 to do the following:

Require landlords to give a security deposit accounting, which includes the amount and source of all funds in the security deposit (in our hypothetical, initially $800 from Curly, $800 from Larry and $800 from Moe) to each tenant (including master tenants and subtenants) in a rental unit at the time of the original renting and also whenever there is a change in the occupants of the unit;
Create a rebuttable presumption that a landlord who refunds a security deposit after the termination of a tenancy via check payable jointly to all of the last remaining original-occupant co-tenants (i.e. to those now vacating tenants named in the original rental agreement) has not violated the landlord’s obligations under §1950.5 insofar as prior (and previously departed) tenants are concerned; and
Assign responsibility for the security deposit refund from the landlord to the tenants who receive it, to equitably share it with their roommates who paid portions of the security deposit to their predecessor tenants, be they co-tenants or subtenants.

A variant of this problem occurs when a roommate vacates before a replacement roommate is found, and the remaining tenant promises the departing tenant that he or she will make the security deposit refund to the departing tenant by collecting it from the new roommate. Unfortunately, sometimes the new roommate balks at paying the security deposit money to a departed tenant, particularly if the new roommate is already ensconced in the flat. In this variant of the scenario, the landlord claims to be totally uninvolved in the process and tells the squabbling tenants and former tenant to work out the problem themselves, and the angry former tenant sues the remaining tenants and, often, the landlord for the withheld portion of the security deposit.

These complicated scenarios occur even when all parties are operating in good faith and no one is attempting to rip off anyone else. But the remedies suggested here would go a long way to preventing such misconduct by landlords and master tenants in this type of situation. They would also assist victims of such rip-offs to obtain just compensation for their damages.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. The information contained in this article is general in nature; consult the advice of an attorney for any specific problem. J. Wallace Oman is a San Francisco attorney specializing in tenant representation. Before that, for almost 20 years he was a staff attorney with the local, federally funded legal services program. He is a co-author of California Eviction Defense Manual, Second Edition (CEB California Continuing Education of the Bar 2006). He can be reached at walloman@aol.com. Copyright � 2007 by J. Wallace Oman and SF Apartment Magazine. All rights reserved.